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Blackstone Says It Plans to Go Public

After a firestorm of speculation, the Blackstone Group, the largest private equity firm in the nation, said yesterday that it would seek an initial public offering that would value the firm at as much as $40 billion and that would offer a first glimpse inside its closely guarded money machine.

Blackstone — which has led multibillion-dollar buyouts of Equity Office Properties, Freescale Semiconductor and Michaels Stores — will be the first of the major private equity firms to go public.

The $4 billion offering is a role reversal for an industry that has long espoused the benefits of private ownership and has acted as a haven for public companies seeking to escape the pressure of meeting quarterly earnings estimates as well as the scrutiny of regulators.

That allure, and the huge war chests of cash raised from pension funds and other big investors, have allowed private equity to go on a record spending spree, acquiring some $600 billion worth of publicly traded companies last year.

It is also an extraordinarily profitable business, as borne out by a preliminary prospectus that Blackstone filed late yesterday. Blackstone’s private equity business, which has $31.1 billion in assets under management, has booked annual returns of 30.8 percent since the firm began in 1987. (After Blackstone took its fees, it still had a robust annualized return of 22.8 percent.) Last year, the private equity business reported income before taxes of $1 billion. Its real estate business had an annual return of 38.2 percent and pretax income of $903 million in 2006.

In the filing, Blackstone disclosed how it hoped to sell shares of its management company — not in the companies it buys out — to the public while continuing to hold on to many advantages of a private business.

The offering is being structured so that partners will continue to control the firm and shareholders “will have only limited voting rights and will have no right to elect our general partner or its directors,” according to the prospectus.

Denise Valentine, a senior analyst with Celent, a Boston-based financial research and consulting firm who reviewed the prospectus, said: “People often speak about alternative investment firms feeling put out with increasing requirements for transparency. Here’s the flip side: Jump into the deep end of the pool and take home the cash. Blackstone carefully structured their I.P.O. to assure management stays in control.”

The filing does signal one change in management control: Peter G. Peterson, who founded the firm with Stephen A. Schwarzman, plans to retire by the end of next year. Mr. Schwarzman indicated that if and when he retires, he will recommend that Hamilton E. James, Blackstone’s president and chief operating officer, assume that authority.

Still, the prospectus was short on the most-sought-after details: the compensation packages of Mr. Schwarzman and his lieutenants. It is unclear how big a payday the offering will be for its partners. But the prospectus did indicate that Blackstone plans to allow its major partners to sell some of their shares to the firm just before the offering — often described as a “midnight payout” — in what could be a payday of several hundred million dollars.

And a special provision allows Mr. Schwarzman to cash out as much $600 million before the offering by selling some of his shares to the offering’s underwriters, which include Morgan Stanley and Citigroup.

The prospectus also hinted at some of the luxuries enjoyed by Mr. Schwarzman and Mr. Peterson. Mr. Schwarzman has a personal airplane, and Mr. Schwarzman and Mr. Peterson together own a helicopter; their air travel was valued at $4.2 million over the last four years.

In a nod to aligning Mr. Schwarzman’s interest’s with the firm’s public shareholders, he will trade all of his current shares in the company for new shares that vest over a four-year period. He will receive a $350,000 salary and performance fees from the firm’s investments. His partners, however, have cut a different deal: they will own shares in the public company, but they will also continue to receive income directly from the firm’s investments, aligning their interests more closely with the firm’s limited partners like pension funds.

In perhaps an effort to head off criticism about the expected huge payday, the firm said its partners would contribute $150 million in equity from the offering to start a foundation that would contribute to charitable causes that the firm or its employees support.

Blackstone is not offering investors access to stakes in its investments, like its recent $39 billion takeover of the office landlord Equity Office Properties. Rather, public investors will be getting units in the management company of Blackstone, which receives management and performance fees from the limited partners.

The offering could put Blackstone at odds with those limited partners over fees. Blackstone’s new shareholders will clearly be hungry for bigger fees, but limited partners could press for lower fees, especially after seeing the firm’s enormous profit margins in the prospectus.

Blackstone also indicated in the filing that it was worried about talk in Washington over possibly changing the way private equity executives are taxed.

In addition to Morgan Stanley and Citigroup, Merrill Lynch, Credit Suisse, Lehman Brothers and Deutsche Bank were listed as underwriters in the offering.

Goldman Sachs, which was an underwriter in the initial public offering of the Fortress Investment Group in February, was notably absent from the list. Many increasingly see Blackstone as a rival to Goldman, which has pushed hard — and successfully — into private equity.

Also off the list is JPMorgan Chase. The firm has a long history of bankrolling Blackstone’s acquisitions. But that relationship might have been damaged when JPMorgan helped finance a rival bid for Equity Office by Vornado Realty Trust and two other firms.